United Arab Emirates: 07/05/2006

Dubai demographics strong, but supply growing

Recent figures from the Dubai immigration authorities point to strong demand for housing in Dubai. But the first signs of significant price discounting are starting to emerge in the Dubai Marina. Whether this is a new trend is probably too early to say but it is being closely watched by analysts.

In March a total of 56,000 new residency visas were issued for Dubai, and many of these visas will have been for the head of a household. Not all of these people will be potential buyers or occupiers of upmarket property in Dubai, indeed 15-17% are said to be in this category in an average month.

This figure translates into a demand for 85,000 property units in 2006, almost exactly the estimate of supply of new property suggested by the estate agency Asteco. In short, new immigrants are supporting the expansion of the Dubai real estate market at its current fevered pace.

That supply and demand are in such a balance should not really come as a shock. It explains why rents are still rising and why it is so hard to find an apartment when you actually try.

Achilles heel

On the other hand, this is also an Achilles heel for the market. Any interruption to that flow of new residents and the backlog of construction projects would quickly result in a huge oversupply.

This does not appear to be on the cards at present, although the near 60% fall in the Dubai Financial Market is a reminder that the emirate is not immune from investment cycles. Besides with so many foreign buyers there does not need to be a problem in Dubai, some kind of financial chaos overseas would have a contagion effect.

The property market, on the other hand, still seems to be strengthening with strong rental rates, new sales and the launching of yet more projects. And the real test will be after the summer, and whether sales rebound after the inevitable summer lull.

In the meantime, the full-page advertisement in the Gulf News this week for the Horizon Tower, and unusual circular tower in the Dubai Marina, is offering four-bedroom apartments from $440,000, which is below the current market rate.

Market risk

Interestingly local Islamic mortgage provider Tamweel is offering 70% finance on this tower, while it is providing 90% finance on villas at present. Perhaps this reflects a difference in the perception of the risk involved in apartments and villas in Dubai.

Most commentators visiting the Dubai Marina point upward to the 40-plus towers of the Jumeirah Beach Residence when asked to hazard an opinion on the direction of the market this autumn, or in early 2007, when the JBR is delivered.

It will indeed be a test of the strength of the Dubai property market to see whether the thousands of new JBR apartments can be absorbed. Given the current level of new residency visas being issued in Dubai some skeptics may be surprised by the outcome, provided that nothing happens in international markets to spook the foreign investors on which Dubai increasingly depends.